The Government of Sri Lanka, under the leadership of President Anura Kumara Dissanayake, has decided not to proceed with the imputed rental ...
The Government of Sri Lanka, under the leadership of President Anura Kumara Dissanayake, has decided not to proceed with the imputed rental income tax proposed by the previous administration. According to the Ministry of Finance, alternative measures are being formulated and will be presented to the International Monetary Fund (IMF) during the next review of the Extended Fund Facility (EFF).
Deputy Secretary to the Treasury, R.M.P. Rathnayake, confirmed that Treasury officials are currently drafting new proposals to replace the imputed rental income tax, which was initially recommended under the $2.9 billion EFF agreement with the IMF. These proposals will be submitted for consideration during the third review of the IMF programme.
The imputed rental income tax, proposed by the former government, was intended to tax the implicit income derived from owner-occupied properties. However, the current administration has expressed strong reservations about this tax, describing it as a levy on "non-existent income." Senior Consultant to the President on Economic Affairs and Finance, Prof. Anil Jayantha Fernando, explained that while the IMF provides revenue generation targets, it is up to each country to devise appropriate measures. The Sri Lankan government is now tasked with identifying viable alternatives that meet the IMF’s requirements without imposing undue burdens on the public.
Prof. Fernando further clarified that the IMF does not dictate specific tax policies but sets revenue goals for governments to achieve. The challenge for the Sri Lankan government is to find ways to increase public revenue to a sustainable percentage of the Gross Domestic Product (GDP) without overwhelming the general population.
The imputed rental income tax was suggested by an IMF study following the abandonment of a national property tax plan by the previous government. That plan had encountered significant obstacles, including constitutional restrictions on property tax collection at the central level and limited capacity for new tax administration. The Sri Lankan Constitution, under the 13th Amendment, stipulates that property-related tax revenues are reserved for subnational governments, such as Provincial Councils, complicating any national-level property taxation efforts.
To address these constitutional and administrative challenges, the IMF recommended the imputed rental income tax as a suitable alternative. The IMF report, titled "Sri Lanka: Technical Assistance Report – Property Taxation at the National and Subnational Level," highlighted that this tax could be implemented under the Inland Revenue Act, with revenues accruing to the Central Government. However, the current government remains opposed to the tax and is seeking alternatives.
While Treasury officials are working on these new proposals, no specific details have been released, and the date for the third IMF review has yet to be set. The review is expected to take place after the upcoming Parliamentary Elections.
Sri Lankan officials are currently in New York attending the 2024 Annual Meetings of the IMF and the World Bank Group, where discussions with the IMF regarding these new proposals are expected to take place. The government remains committed to meeting its financial obligations under the EFF programme while seeking revenue solutions that are practical and sustainable.
This development marks a significant shift in the government’s approach to taxation, as it moves away from contentious policies and seeks alternatives that better align with the country’s economic realities and constitutional framework.
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